The magnitude of the current economic crisis makes it abundantly clear that there is significant room, and need, for improvement in current credit assessment approaches. With fallout from the 2007 mortgage market problems lingering into 2008, large investment banks and other institutions have being forced to sharply increase their write-offs on mortgage-linked assets to the scale of tens of billions of dollars. As the subprime mortgage market crisis continues to unfold, lenders, investors and other market participants are exploring cause and cure of the subprime problems, especially in the area of underwriting and the technology that facilitate automation in that area.
It has been recognized that development in automated underwriting technology has played a significant role in encouraging lenders to penetrate deeper into the subprime loan pool. To a large extent, subprime lenders believed any additional risk they were taking on was covered using advances in credit scoring, and scoring system policy overlays, that enabled them to effectively price that risk and charge borrowers on the basis of their fully quantified credit worthiness. This contributed to the rapid development of the subprime loan market and created greater access to homeownership for some segments of borrowers, such as low income and minority households. However, improper use of credit scoring and automated underwriting presented incomplete risk analyses and weakened underwriting standards and policy, with the end-result being a drop in loan quality.